Growing by exciting : a study of the effects of perceived firm innovativeness on customer satisfaction, customer loyalty, and firm performance

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Growing by Exciting: A Study of the Effects of Perceived Firm Innovativeness

on Customer Satisfaction, Customer Loyalty, and Firm Performance

Anneline Westgård Solberg and Emilie Berg Kaasin Supervisor: Seidali Kurtmollaiev

Master thesis, Master of Science in Economics and Business, Business Analysis and Performance Management, Marketing and Brand Management

NORWEGIAN SCHOOL OF ECONOMICS

This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work.

Norwegian School of Economics Bergen, Fall, 2018

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Preface

This master thesis is one of a series of papers and reports published by the Center for Service Innovation (CSI). Center for Service Innovation (CSI) is a coordinated effort by NHH to focus on the innovation challenges facing the service sector and involves 15 business and academic partners. It aims to increase the quality, efficiency and commercial success of service innovations and to enhance the innovation capabilities of its business and academic partners. CSI is funded through a significant eight year grant from the Research Council of Norway and has recently obtained status as a Centre for Research-based Innovation (SFI).

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Abstract

Today’s increasing focus on innovation in competing for the customers’ attention, has become a highly relevant research topic. Yet most research has focused on customer satisfaction as the most important antecedent of loyalty, and that customer loyalty is a main indicator of enduring firm performance. Thus, previous research has only minimally considered the role of perceived firm innovativeness in relation to firm performance. In addition, most previous researchers have focused on innovativeness from a firm-based view. Consequently, the customer’s point of view, which is crucial for innovation efforts to succeed, is neglected, and there is scarce knowledge about how customers’ perceptions of the innovativeness of the firm can affect firm performance through the mediating factors of customer satisfaction and loyalty. Therefore, the goal of this study is to examine the way perceived firm innovativeness affects firm performance which is a part of the profitability picture, through the mediating effects of customer satisfaction and customer loyalty. Thereby, we aim to fill a gap within the field of innovativeness and firm performance.

After establishing a theoretical model with the prescribed relationships, we conducted a multiple-source secondary data study by using the respective indexes the Norwegian Innovation Index (NII) and the Norwegian Customer Barometer (NCB), in addition to financial data from annual reports and the Norwegian business finder service Proff. After analysing the respective variables by using the Hierarchical Linear Regression and Process Macro, we found that perceived firm innovativeness affects firm performance through the mediating effects of customer satisfaction and loyalty. We also found that perceived firm innovativeness has a stronger effect on customer loyalty than customer satisfaction has on loyalty, challenging the established theory that emphasises satisfaction as the most important antecedent of loyalty.

Keywords: Perceived Firm Innovativeness, Customer Satisfaction/Quality, Customer Loyalty, Firm Performance, Income Growth.

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Acknowledgements

This master thesis is a requirement for the MSc in Economics and Business Administration programme at the Norwegian School of Economics (NHH). Our majors are in Marketing and Brand Management (MBM) and Business Analysis and Performance Management (BUS).

Innovation, customer satisfaction, loyalty and firm performance are topics that highly interest us; therefore, we feel honoured to have been a part of the research project between the NHH and Bekk Consulting AS (Bekk) regarding how perceived firm innovativeness may affect firm performance through customer satisfaction and loyalty. Studying a topic as important as innovation and firm performance has been rewarding, exciting and extremely educational.

Writing this thesis has been an unpredictable and inspiring journey, and it also marks the end of our studies at NHH.

We certainly would not have been able to achieve this without support. First, we would like to express our gratitude to Seidali Kurtmollaiev for supervising us in this process. His guidance, expertise and engagement in this project have been paramount to us. We highly appreciate his close cooperation, constructive feedback and discussion, all of which challenged us to think critically. Second, we would like to thank Bekk providing us with the initial dataset. Here, we want to thank Arne Tjora and Stian Daazenko from Bekk who gave us guidelines to collect the data. Third, we would like to thank The Center for Service Innovation (CSI) for letting us be a part of this project and providing us with the necessary resources to conduct this research. Moreover, we would like to thank the CSI for funding the research project and for helping us communicating with Bekk.

Lastly, we would like to thank each other for excellent teamwork during this process.

Bergen, December 2018

Anneline Westgård Solberg Emilie Berg Kaasin

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List of Tables

Table 1: Explanation of the Variables ... 38

Table 2: Descriptive Statistics and Tests of Normality ... 71

Table 3: Coefficients and Model Summary (Income Growth) ... 73

Table 4: Coefficients and Model Summary (Customer Loyalty) ... 74

Table 5: Indirect, Total Indirect Effect and Total Effect ... 77

Table 6: Hypotheses Support - Presentation of the Main Results ... 80

Table 7: Descriptive Statistics and Tests of Normality (Additional) ... 82

Table 8: Coefficients and Model Summary (Income Growth17 - Additional) ... 83

Table 9: Coefficients and Model Summary (Customer Loyalty17 - Additional) ... 84

Table 10: Indirect Effects, Total Indirect Effect and Total Effect ... 86

List of Figures

Figure 1: Our Proposed Research Model ... 36

Figure 2: Overview of the Direct and Indirect Effects ... 76

Figure 3: Our Revised Research Model ... 78

Figure 4: Overview of the Direct and Indirect Effects - Additional Analysis ... 85

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1. Introduction

1.1. Background

In today’s market, companies are faced with high requirements to create a competitive advantage (Aarrestad & Hem, 2008) and a common objective for most companies is maintaining profitable operations (Thoresen & Skøien, 2013). Here, focusing on the customers is essential because customers create profitability for a firm (Lem, 2010). Thus, the income of a company depends on the customers, and especially loyal ones which are the foundation for future success, the key driver for long-term performance and an important aspect in maximising profitability (Selnes, 2002; Rousler, u.d, Murphy & Murphy, 2002).

Moreover, loyal customers are more likely to spread positive word of mouth and recommend a brand to others and to increase the repurchase rate, which have major effects on the customer’s lifetime value (Silseth, 2016; Rousler, u.d.; Murphy & Murphy, 2002; Donkers, Verhoef & de Jong, 2007). Furthermore, in today’s market, because of the development of technology and increased expectations and competition, customers may be more loyal towards innovative companies (Kurtmollaiev, Lervik-Olsen & Andreassen, 2018). However, when customers have several different products and services to choose from, customers may not stay loyal if the company does not satisfy their needs. Therefore, customer satisfaction may also be an essential piece of the total profitability picture, and empirically, it has been emphasised as the most important antecedent of loyalty (Nyhus, 2014; Silseth, 2016;

Samuelsen, Silseth, Lorentzen & Lervik-Olsen, 2007b).

An important question remains regarding how companies can keep customers satisfied to exploit the positive effects of satisfied and loyal customers. This is a major concern and may be more difficult to achieve in today’s rapidly moving market because what companies have done before to succeed does not necessary lead to success now or in the future (Thoresen &

Skøien, 2013). This illustrates the importance of companies being open to renewing themselves, and especially with the digital transformation, the value of innovation is increasing. According to an annual global survey by the Boston Consulting Group, 79% of the respondents ranked innovation as either the highest priority or a top three priority in their companies (Ringel, Taylor, & Zablit, 2015). Furthermore, a growing number of enterprises are facing more threats. This can be because of other companies better exploiting the changes

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in technology, customer behaviour or the availability of data information to create innovative, customer-friendly alternatives to the products and services that incumbents offer (D’Emidio, Dorton & Duncan, 2015). Thus, innovation is crucial and on the companies’ agenda.

However, although there are several underlying motives for innovating, the common goal for all of them is to contribute to increasing the customer’s individual welfare – directly or indirectly – to improve the company’s finances and to make profitable returns on the company’s innovation investments (Kurtmollaiev et al., 2018; Norheim, 2018; Andreassen, 2018; Einarsen, 2018; Madsen, 2003). As the competition tightens, companies are innovating intensely to increase profits, as noted, ‘innovation that results in the acquisition of new customers and the retention of existing ones is imperative in most organizations’ (Kunz, Schmitt & Meyer, 2010, p. 816; Wilke & Sorvillo, 2005).

However, companies often have an internal approach towards innovations, focusing on high quality, improvements in their market offerings or bringing their costs down. Companies, though, rarely consider the customers’ perspective and their perceptions of the company’s innovation activities (Kurtmollaiev et al., 2018). Evidently, it is becoming more clear that consumers fail to buy products that companies expect them to adopt; studies show that most innovations fail during the first three years (Wilke & Sorvillo, 2005). The reason why consumers fail to adopt these innovations may not necessarily be because of the economic value of the physical products but may be explained as being ‘more in the minds of people’

and a more psychological process (Gourville, 2006, p. 10). Gourville (2006, p. 10) describes further, until businesses understand these underlying psychological factors and ‘respond to the psychological biases that both consumers and executives bring to decision making’, the

‘new products will continue to fail’.

To make innovation efforts successful in the market, it is important for companies to apply an approach in their innovation efforts that is consistent with the market’s needs and desires. By companies using an internal approach towards innovations, the customers’ perceptions are given minimal attention, and this may lead to a mismatch between the customers’ and the firm’s perceptions of innovativeness (Kurtmollaiev et al., 2018). Especially, with the customers operating as the final judge of whether the companies’ innovations succeed or fail in the market, the customers point of view should be given extensive focus. Indeed, the customers’ perceived firm innovativeness is a function of the company’s overall activities, and based on the enduring innovations efforts of a firm, not solely on a firm’s one-time action

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(Kunz et al, 2010). Therefore, a more continuous and external marketing-based view with a customer-centric perspective considering innovations is essential, rather than an internal and solely economical one (Wilke & Sorvillo, 2005), to change the customers perceived firm innovativeness.

Innovating by using a continuous and customer-centric approach may create a win-win situation where the customers get increased benefits from adopting new products while the companies enjoy the benefits of improved firm performance. Furthermore, companies seen as creative and innovative may appear as the preferable option relative to other competitors in the market, thus, attract and retain customers more easily (Kurtmollaiev et al., 2018).

Moreover, in today’s globalised market, where the customers are faced with countless offers, the need for companies to differentiate themselves through innovations is even more important in order to be noticed and attractive in the market (Kunz et al., 2010). Further, innovations create excitement and feelings, which is crucial in bringing customers into a long- term relationship with the company (Lervik-Olsen, Kurtmollaiev & Andreassen, 2016).

Currently, the world is devloping faster than ever. Landlines are fading out, and new technologies are being introduced and used, opening the way for new types of competitors to enter the market and more rivalry to arise in different industries. Disruptive innovations challenge existing businesses by capturing market shares when customers start adopting the new entrants’ offerings, driving down prices and putting pressure on the margins of existing companies (Christensen, Raynor & McDonald, 2015). To keep income and performance at a certain level and to grow and survive in the market, companies’ ability to innovate and renew themselves successfully requires looking at the future customers’ needs and desires. In Norway, we have seen these tendencies being stronger than ever (Norheim, 2018). However, innovation requires a lot of effort and investments with no guarantee of success. In the end, the customers’ perceived firm innovativeness, their level of satisfaction and loyalty may be important for firm performance and future success, making the customer perspective essential to investigate. By combining marketing and business analytic perspectives, we can look at both the customer side and the financial side, which are both crucial and need to be aligned to create enduring and successful innovations.

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1.2 Research Question and Purpose

The purpose of the current research project is to investigate how customers’ perceived firm innovativeness may affect a firm’s performance, which will be done in the context of the Norwegian market. To analyse this relationship, we check if perceived firm innovativeness impacts firm performance through other variables – namely customer satisfaction and loyalty – which are established concepts in the marketing literature. However, although there have been multiple studies researching and building the link between customer satisfaction, loyalty and profitability (Silseth, 2016; Cho & Pucik, 2005), the question of how perceived firm innovativeness affects firm performance and how innovativeness may be a factor in explaining customer satisfaction and loyalty have not been examined in detail. This lead us to the following research question:

RQ: ‘How do perceived firm innovativeness, customer satisfaction and loyalty affect firm performance?’

We aim to further investigate the impact of perceived firm innovativeness on customer satisfaction, loyalty and firm performance and the mediating factors in this relationship. By taking a customer perspective instead of a firm-based view, we strive to obtain deeper knowledge about the link between the customers’ perceptions of the firm’s innovation efforts and the subsequent effects this has on customer satisfaction and loyalty on a more detailed and differentiated level. By investigating these possible relationships, we wish to contribute with new insights in the ongoing discussion within this field of research.

1.3. Boundaries of The Thesis

In the present research, we focus on available data from a selection of companies that span two years. Furthermore, only the largest and leading companies within each industry are included, based on the research conducted to develop the Norwegian Innovation Index (NII) and the Norwegian Customer Barometer (NCB). The companies included are – to a certain extent – nationwide, and together, they account for about 70% of industry turnover on a national basis (with some exceptions). Further, the current research is based on the Norwegian market and uses perceptions and data based on Norwegian customers.

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1.4. Structure of the Thesis

The thesis comprises seven chapters. In chapter 2, the theoretical framework for developing the research model and hypotheses is presented. A thorough explanation of the concept of firm performance, customer loyalty and satisfaction are provided before looking at perceived firm innovativeness and how these constructs of interest have been linked together in previous research.

Chapter 3 presents our proposed research model and accompanying hypotheses. The research methods used are discussed in chapter 4, and the results of the empirical analyses and hypotheses tests are presented in chapter 5, including a presentation of the main results. In chapter 6, the theoretical and managerial implications are provided. In addition, an assessment of the validity, reliability and general limitations are provided in chapter 7, as well as directions for future research and an overall conclusion of the current study.

To clarify, the terms ‘customer’ and ‘consumer’ and ‘firm size’ and ‘employees’ are used interchangeably throughout the paper with no variation in their meaning.

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2. Theoretical Perspectives

In this section, we focus on our constructs of interest: firm performance, customer loyalty, customer satisfaction and perceived firm innovativeness. Throughout this chapter, we emphasise the relevance of these variables and what is interesting about them, relevant previous research and criticism of existing models used to explain these constructs. Based on these theoretical perspectives, we present our constructed research model and formulated hypotheses.

2.1 Firm Performance

Firm performance is related to the term ‘profitability’, which is composed of two words, namely, profit and ability (Tulsian, 2014). The term profit is exceeding the selling price of goods over their cost and the term ability ‘indicates the power of a business entity to earn profits’ (Tulsian, 2014, p. 19). The ability of a firm also denotes its earning power or operating performance. Therefore, the profitability can be defined as the ability of a given investment to earn a return from its use. Based on this definition, firm performance and profitability are closely related to each other. Thus, even though some of the previous research measures only profitability, we still think it is relevant and interesting to look at this research because the results can give insights and be comparable to some degree.

Further, profitability consists of both an income and a cost side. Income is one of the main indicators for firm performance, and in most cases, it is the only component of the profitability picture that reflects the customer’s behaviour. Thus, income directly depends on customers. Value creation in a company equals the value of goods and services sold within a certain period of time (Hoff, 2013). Hence, customers impact income by affecting volume and prices, so it is natural to look more at the income perspective. In addition, because income is an important component of firm performance, we can use income as an indicator for firm performance.

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2.1.1 What Impacts Firm Performance

From an economic perspective, one factor affecting income and firm performance is the interests of assets, such as bank deposits (Visma, u.d.a). In addition, the income size is also affected by the number of products sold and the price of the products and services of the company (Edholm, 2017). Thus, a higher income could be the result of customers buying an increased volume of either existing or new products and services and/or paying a higher price for these products and services. Although the customers do not set the price directly, their willingness to pay is reflected in the prices that the company sets. Furthermore, what the customers are willing to pay depends on how they evaluate the company’s offerings relative to other competitors and substitutes; thus, customers can indirectly influence what companies charge for their products and services. The price also depends on the company’s position in the market and the competitive landscape, meaning that more and stronger rivalries in the industry are external forces that may lead to a reduction in prices and margins (Besanko, Dranove, Shanley & Schaefer, 2013). This is something that customers do not have a direct impact on, other than the fact that they can evaluate one company’s products and services as being superior to other competitors and continue to buy one company’s products, even at a higher price. If the company is not able to increase the demand with a reduction in price, it will result in a reduction in income.

This illustrates how companies are in a continuous battle to gain customers’ attention in a competitive market. Customers in today’s market are met with countless offers from different providers, and a company’s performance in the market depends on their ability to attract and retain customers. Therefore, the importance of innovations to differentiate themselves from other competitors is on the rise in today’s market (Kunz et al., 2010). Furthermore, most companies name innovation as one of their top three priorities (Ringel, Taylor, & Zablit, 2015). Therefore, companies are conducting continuous innovation efforts to attract and retain customers, the common goal of which is to increase the customer’s individual welfare, directly or indirectly, and to improve the company’s finances by making profitable returns on their innovation investments (Kurtmollaiev et al., 2018; Norheim, 2018; Andreassen, 2018;

Einarsen, 2018; Madsen, 2003).

This shows the importance of innovation for firm performance and it is therefore essential to define innovation in this context. Because this thesis was done in collaboration with the CSI,

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it is natural to base the definition of innovation on the same interpretation as the CSI, which is based on Schumpeter’s definition of innovation. According to Schumpeter (1934), an innovation ‘is a new idea that is commercialized’ (Lervik-Olsen et al., 2016, p.1). The definition does not put similarities between research and development (R&D) attempts and innovations or between inventions and innovations, which are two of the reasons why we are using this specific interpretation. Schumpeter’s definition emphasises the fact that to be an innovation, a new idea must have been launched and seen by customers. That is, ‘the new idea must lead to a noticeable change in a customer experience’ (Lervik-Olsen et al., 2016, p. 1;

Andreassen & Lervik-Olsen, 2016).

Furthermore, a company’s income and firm performance fluctuates with the customers’

desires to adopt the company’s product, their desires to buy more or less and/or their willingness to pay for the product. This is related to how the customers view the product or service and how satisfied and loyal they are with the company and what the company is offering. Based on this, it is interesting to look at what impacts a customer’s decisions to adopt a company’s products or services. There are a number of factors that can influence customers’ purchasing decisions, and thus affect income. For instance, the competitiveness and rivalry explained above can press margins and limit the income for companies; also, the state of the economy can affect income because it impacts the customers’ purchasing power.

Furthermore, it may also be political or sustainability factors associated with a brand, product or service that may impact consumers’ willingness to adopt a product. Indeed, no matter the cause for a customer buying a product, empirically, customer loyalty been emphasised as the key indicator for firm performance (Lervik-Olsen et al., 2016; Silseth, 2016). This leads us to our second construct of interest: customer loyalty.

2.2 Customer Loyalty

Customer loyalty is an expression of a customer’s expected behaviour and thus relates to how a business will succeed in the future, which is an expression of profitability (Oliver, 1999).

Furthermore, customer loyalty is the likelihood that customers will maintain their customer relationship with the service provider, whether they will recommend the business to others in a positive way (word of mouth) and if they want to continue their customer relationship in the future (Oliver, 1999). This is ‘despite situational influences and marketing efforts having the

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potential to cause switching behavior’ (Oliver, 1999, p. 34). Loyalty can further be divided into two different types: namely cognitive and affective affiliation (Samuelsen et al., 2007b).

Cognitive loyalty implies that one brand is preferable to its alternatives and that loyalty is based on brand beliefs only. In addition, the loyalty may be based on prior or vicarious knowledge or recent experience-based information (Oliver, 1999). Affective loyalty, though, implies a liking or attitude towards the brand based on cumulatively satisfying usage occasions.

2.2.1 Customer Loyalty as a Main Indicator for Firm Performance

To improve firm performance, firms depends on customers, especially loyal customers, who, empirically, have been emphasised as a main indicator for firm performance. According to Silseth (2016), customer loyalty will impact profitability because loyal customers are more likely to come back and repurchase products and services from the company, engage in word of mouth and increase the share of wallet (customers buy more). In addition, loyal customers will continue using the company’s products and services, which contributes to higher income in the long run (Webber, 2008). For instance, when looking at one customer who buys a new car every four years, if this customer buys Toyota one time, the company’s income increases because of that one car purchased. However, if the customer is loyal over a time period of 40 years, this would result in increased income and volume for an equivalent of 10 years (one new car every four years). This illustrates how loyal customers can be an important indicator for firm performance from a long-term perspective; this is supported by Selnes (2002), who claims that customer loyalty shows the probable income stream the company can expect in the future.

However, important drivers for long-term profitability are not just loyalty itself, but also the number of loyal customers (Selnes, 2002). Indeed, the value in keeping existing customers satisfied with the product and the brand is impossible to ignore. The global marketing research firm KISSMetrics estimates that the average cost of a lost customer is $243 (Probstein, 2009). According to Webber (2008), it can cost up to five times more to acquire new customers than to keep current ones. Looking at this in an isolated situation, the company that sells more products to current customers will have significantly higher profits. This shows the value of promoting customer loyalty because gaining new customers at the expense of old ones is a losing proposition in competitive industries. The average company loses 10%

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of its customers every year (Rousler, n.d.). By focusing on customer loyalty, the churn rate can be lowered to 5%, and the profitability of the organisation will increase by 25–125%, depending on the industry. According to Gartner Group (Rousler, n.d., p.1) ‘80 percent of your company’s future revenue will come from just 20 percent of your existing customers’.

The Harvard School of Business (HBS) has a tool for measuring customer loyalty. The Customer Lifetime Value Calculator (CLV) shows businesses the effect that customer retention has on profits over time. The CLV can be defined as ‘a measure of a customer’s aggregate profit to the firm over the total time that the customer deals with the firm’ (Fripp, 2014, p. 2) and is ‘calculated as a single dollar number, which summarizes the net profit/loss position of the customer’s total relationship with the firm (p. 2). It is “calculated on per customer basis, but is more usually determined for the average customer within a particular market segment” (Fripp, 2014, p. 2). According to the HBS, customer loyalty increases the profits by encouraging repeat business, reducing the operating costs for a business, establishing a favourable price premium, and by generating referrals. Yet also, it is also important for businesses to find new customers (Rousler, n.d.). But the fact remains that a company’s current customers will be the foundation of their future success. In addition, the customer profitability rate tends to increase over the life of a retained customer (Murphy &

Murphy, 2002). Although there is an unquestionable correspondence between loyalty and firm performance, there are situations in which individual consumers do not have the opportunity or need to reconsume but remain loyal nonetheless (e.g., alumni); this illustrates that loyalty is a crucial element for firm performance.

2.2.2 What Impacts Customer Loyalty

We have established that loyalty is an important factor for firm performance. However, an important question remains regarding how companies can keep customers loyal, to exploit these effects. To understand how customer loyalty works, it is essential to look at the factors that may impact customer loyalty. When customers choose to stay loyal to one brand, they omit a market full of other possible providers (Andreassen, Kurtmollaiev & Lervik-Olsen, 2017). Some factors that may impact this decision may be brand reputation, the creditability of the firm or the scale of the firm (Sander, 2017). First, as customers are evaluating different providers, they may consider the potential risks involved with different alternatives. For instance, purchasing from a brand that is fairly well-known in the market, a brand that the

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customer has heard positively about or been recommended by others, may decrease this risk (Sander, 2017). Especially for high-value products where the financial risk is larger, these factors may impact the choice of provider; thus, the nature of the product may also impact the level of loyalty a company can gain; so companies with a well-established name might increase creditability and have an easier time keeping customers loyal (Bråthen, 2017).

Furthermore, factors such as the level of experience and time that the company has operated in the market and the scale of the company may influence the creditability of the company, thus affecting customer loyalty. It may also be that a combination of multiple factors will make a company more attractive and the preferred option for the customers, and in that way affect the customer loyalty of the brand in question. Based on these examples and the fact that customer loyalty is highly individual and subjective, it can be difficult to explain what impacts customer loyalty. However, in the literature, customer satisfaction has been mentioned as an important predictor for customer loyalty.

Research by Samuelsen et al. (2007b) indicates the important relationship between customer satisfaction and loyalty through perceived reputation and calculative and affective affiliation.

Customers’ intentions regarding their relations with companies are measured through these three components, showing the expected future behaviour of customers. In this context, calculative association means to what extent the customer maintains the relationship with the company because it would be rationally correct to do so. This may be because of the fact that the company has the best economic conditions or because there is a lack of alternative suppliers. Research shows that calculative association is a driver for future intentions (Samuelsen et al., 2007b). Affective association, though, is based on the customer’s emotional relationships and identification with the supplier; these relationships are assumed to have an intrinsic/self-worth value that can hardly be replaced by competing offers. Finally, reputation is an attitude-based variable that expresses the customer’s perceptions of the company, and research shows that perceived reputation affects the customer’s affective affiliation with the company. Reputation is, of course, important in terms of recruiting new customers. However, among existing customers, it is the customer’s satisfaction that is indicated to have the greatest impact on customer loyalty (Nyhus, 2014). The fact that customer loyalty is affected by customer satisfaction, is also supported by the research of Lervik-Olsen et al. (2016).

Building customer loyalty means having an approach that emphasises customer satisfaction over short-term sales numbers. Even if a company makes record profits by selling a product

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but loses customers, the earning potential for the organisation in the future will be significantly reduced. This illustrates the importance of customer satisfaction, which empirically has been shown to be the most important antecedent of loyalty (Nyhus, 2014;

Samuelsen et al., 2007b). This brings us to our next constructs of interest: customer satisfaction.

2.3 Customer Satisfaction

Customer satisfaction is an assessment of what customers get compared with their expectations (Oliver, 1980), and this is experienced through the level of quality and possible variance in quality (Lervik-Olsen et al., 2016). Therefore, perceived product quality is important for the customer to be satisfied (Selnes, 2012). Even though the literature includes different definitions and dimensions of quality, it is almost universally perceived as a dynamic threshold that a firm must meet to satisfy customers (Cho & Pucik, 2005). Furthermore, because our research spans multiple years, our theoretical framework treats customer satisfaction as cumulative. This means that we look at customer experiences with the company over time. Satisfaction is measured in relation to the customer’s expectations of the company, how it is relative to competitors and in relation to an ideal supplier in the industry (Samuelsen et al., 2007b). Customers’ satisfaction with a company can affect future purchase intentions, the degree of affective and calculative association with a company and also customers’ perceived reputation of the company. In other words, perceived quality can be a possible indication of how positive or negative existing customers’ attitudes towards the brand are (Samuelsen, Peretz & Olsen, 2007a).

2.3.1 The Link Between Customer Satisfaction, Loyalty and Firm Performance Companies should be concerned about creating good customer relations because of the value of satisfied customers. According to Silseth (2016), more satisfied customers leads to more loyal customers. Furthermore, with increased satisfaction, the customers become less price sensitive; hence, increased customer satisfaction can lead to increased profits and firm value thanks to these loyal customers (Silseth, 2016). Thus, based on previous research, we see a clear established link between customer satisfaction and firm performance in which loyalty mediates this effect.

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However, empirically, research also indicates that there is a more direct link between customer satisfaction and firm performance. According to Silseth (2016), targeted work to satisfy customers can create a win-win situation where customers are satisfied while the company earns more. Therefore, customer satisfaction may be very profitable. Cho & Pucik (2005) identify three major empirical studies in the literature, and the first uses the Profit Impact of Marketing Strategies (PIMS) database. As Cho and Pucik (2005) note, most studies have found that superior quality has a positive relationship with a higher ROI (Buzzel & Gale, 1987; Phillips, Chang & Buzzell, 1983; Schoeffler, Buzzell & Heany, 1974), yet Wagner (1984) finds inconclusive results on the relationship between quality and ROI. Second, Cho and Pucik (2005) look at a series of studies conducted with the American Customer Satisfaction Index (ACSI) between customer expectations, perceived quality, perceived value, customer satisfaction, customer complaints and customer loyalty (Fornell, Johnson, Anderson, Cha & Bryant, 1996). In relation to this, Ittner and Larcker (1996) reported a positive relationship between the ACSI’s customer variables and financial measures, such as return on assets, market-to-book ratio and price-earnings ratio. Third, Cho and Pucik (2005) note the studies that examined perceived quality data from the EquiTrend Quality Assessment Database (EQA) of the Total Research Corporation. Here, for instance, Aaker and Jacobsen (1994) find a positive relationship between stock return and perceived product quality in 34 companies traded on the U.S. Stock Exchange, implying that quality is positively related to a firm’s economic performance measure. Repeated findings on quality, either measured by customer satisfaction or perceived quality, provide a growing body of evidence that the relationship between customer satisfaction and firm performance is positive. Interestingly, research on customer satisfaction has predominantly used profitability rather than growth as a measure for firm performance (Cho & Pucik, 2005). This may indicate that this field of research lacks an income growth measurement, illustrating the importance of our approach.

2.3.2 What Impacts Customer Satisfaction

From previous research, we can see that customer satisfaction can have a positive effect on the firm. Thus, it is interesting to look at the factors impacting customer satisfaction in order for a firm to exploit these effects. However, a company cannot directly affect customer satisfaction (Wilson, Zeithaml, Bitner & Gremler, 2012; Samuelsen et al., 2007b). For a company to impact the degree of customer satisfaction, they must use certain action variables

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(Wilson et al., 2012), which are named in the literature as the marketing mix (Wilson et al., 2012; Framnes, Pettersen & Thjømøe, 2011). The original marketing mix consists of four action variables: product, price, promotion and place/distribution (Framnes et al., 2011). In addition, we can say that the marketing mix consists of seven components if we expand it to include physical evidence, people and process (Professional Academy, n.d.). The research done by Silseth (2016) and Samuelsen et al. (2007b) indicates that there are four different variables affecting customer satisfaction and perception of justice regarding different products and services in question. Similar to the marketing mix, these include ‘price’, ‘material quality’, ‘ability to react”’ and ‘personal treatment’. Here, Silseth (2016) and Samuelsen et al.

(2007b) are also basing their research on the marketing mix but by focusing on the four specific variables mentioned in the previous sentence. Thus, customer satisfaction is not something a company can affect directly; therefore, it is not possible to observe which attitude the customers have towards a brand (Wilson et al., 2012). However, customer satisfaction may give an indication of the customer’s attitudes (Samuelsen, Peretz & Olsen, 2007a).

2.3.2.1 Customer’s Attitudes

People have a limited information capacity, and instead of keeping in mind all the possible information about different brands, customers establish attitudes towards them. This is called the ‘functional attitude theory‘. The functional attitude theory addresses the underlying motives people have for their attitudes; it is intuitively easy to accept but difficult to practice because companies find it hard to uncover what motives different people have. This is easier to understand when learning about the different functions of an attitude (Samuelsen et al., 2007a).

The attitude theory distinguishes between the different types of attitude functions (Samuelsen et al., 2007a). According to Keller (2003, p. 463) ‘Consumers ... might like and use certain brands because they satisfy their needs (utilitarian function), allow themselves to express their personality (value-expressive function), bolster a perceived weakness they have (ego- defensive function), or simplify decision making (knowledge function)’. In general, attitudes have a knowledge-organising function and an instrumental function. That is, they simplify the decision-making process and keep track of what is good, what is less good and should be avoided. In addition, attitudes in different situations can serve as an ego-defensive function, meaning that in some circumstances, customers like or do not like brands because it means

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that they do not have to confront a weakness in themselves. For outsiders, it can be hard to understand why customers have positive or negative attitudes towards the firm’s brands because attitudes are not necessarily a direct reflection of the brand’s objective characteristics (Samuelsen et al., 2007a). Hence, it can be hard to readjust or impact people’s attitudes because they already might have an attitude towards the brand based on underlying motives.

Attitudes represent a summary evaluation, and as the knowledge-organising function indicates, people use their attitudes more or less consciously when making decisions in their daily lives (Samuelsen et al., 2007a); this means that an attitude mediates the effect of a customer’s actions on his or her behaviour. Here, ‘mediating’, is the effect of one’s actions on behaviour and how these actions can ‘get lost’ if one does not understand how attitudes act as an intermediary on behaviour.

All companies naturally want their customers to have positive attitudes or perceptions of their brand. However, attitudes do not always affect behaviour directly. For instance, two customers can have similar positive attitudes of the same brand, but only one of them may buy it, while the other may choose to go with competitors. An important reason for this paradox is that companies forget that attitudes not only vary in how positive they are, but also in how strong they are (Samuelsenet al. 2007a). Thus, even though a customer has a positive attitude towards a brand, it does not mean that the customer will buy it. Furthermore, if the customer is satisfied with a brand, it does not mean the customer will repurchase it (Silseth, 2016). This illustrates how customer loyalty may be important to the relationship between customer satisfaction and firm performance and how attitudes can be difficult to work with.

However, because attitudes can indicate customer satisfaction, it is important to understand the different drivers for people’s attitudes and what their emotions consist of, especially because feelings are an essential part of innovations. In addition, this establishes a possible relationship between innovations and customer satisfaction.

2.3.2.2 Customer Emotions

As of today, there is a lot of literature on the rational evaluation of companies, which is reflected in measuring the quality of purchased and consumed goods and services. However, there are few studies on the customers’ feelings, enthusiasm and commitment to companies.

In other words, current theories do not show whether the average of Norwegian companies’

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customer satisfaction is related to active – or raised – feelings or passive feelings. Active – or raised – feelings can, for example, be enthusiasm, while passive feelings can be habits or unpredictability (Plutchik & Kellerman, 1980; Russel, Weiss & Mendelsohn, 1989).

However, from an economic perspective, it is not clear what is really best for the business beyond the fact that high perceived quality is better than low perceived quality (Lervik-Olsen et al., 2016). What is certain is that everything becomes a habit over time. For example, the pleasure of buying a new car decreases over time; the product is of the same high perceived quality, but the customer’s feelings have fallen from active to passive. This shows that customers’ emotions are one part that explains customer satisfaction. For other products and services, it may be more desirable to change and innovate the company’s products or services.

For instance, this is noticeable in the mobile market, where Apple is regularly upgrading its products (Lervik-Olsen et al., 2016). So it might depend on the nature of different products or services in terms of to what degree innovation efforts will have an effect on firm performance.

Customers are satisfied when they get new or more options to choose from, better product or service delivery and improved physical environments – hence new changes in the marketing mix – which makes them excited and engaged. Indeed, one way to excite customers and improve the company’s offering across multiple dimensions is through innovations. Again, Apple is a good example of how continuous innovations, improvements and offerings in the market can have positive effects. For instance, by releasing a new iPhone every year, consumers may become curious and excited about what the design will look like, what new technologies and functions it will have and so on. Furthermore, this may lead to customers feeling engaged and satisfied with the company, illustrating how a company that is innovative and perceived as innovative by customers may increase customer satisfaction.

Customer satisfaction is also related to emotions and the customer’s expectations of the company (Samuelsen et al., 2007b). According to Lervik-Olsen et al. (2016), innovations, both small and big, and either successful or failures, create feelings among customers and shareholders, who has a direct impact on the bottom line. Feelings are necessary to engage customers in a long-term relationship with the company. The customer’s emotions consist of two different dimensions: cognitive satisfaction, which comprises positive or negative emotions, and emotional satisfaction, which refers to active or passive emotions (Kunz et al., 2010). A combination of cognitive and emotional satisfaction drives the customers’

perceptions of the company’s innovativeness; these emotions are also related to the fact that

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customers tend to overvalue the value of the products they already own or use (Gourville, 2006). This can be taken in context with the fact that customers tend to undervalue the benefits and value they will get by adopting innovations instead of consuming incumbent products or services (Gourville, 2006).

Innovations in the marketing mix can have positive effects on customer satisfaction, for instance, in an expansion in the offerings. One example includes ‘Meny’, a Norwegian and Danish supermarket chain, which has a wide range of products and brands, which may attract customers. Despite this large selection, consumers often tend to purchase the same products and brands that they already use, which may be the attitude function related to ‘simplify decision making’. However, the customers’ level of satisfaction and loyalty towards the brand may still increase because the option to choose is what is important here. This relates to both innovations in the marketing mix by expanding offers, but also towards attitudes and satisfaction. Indeed, downsizing a company’s offerings can lead to less loyal and satisfied customers. One example of this is ‘Rema’, a Norwegian supermarket chain; cutting their selection when they introduced ‘the best friend strategy’. This example illustrates how it can be a trade-off between a company trying to achieve good procurement conditions and satisfied customers. These two objectives may come in conflict, and in the ‘Rema’ scenario customers may have been disappointed and it may have affected their satisfaction and loyalty (Neegaard, 2016; Dalen & Nilsen, 2017; Wig, 2017).

As we can see, innovativeness creates feelings, and feelings are required for long-term relationships (loyalty), and cognitive and emotional satisfaction affects customers’

perceptions of innovativeness (Lervik-Olsen et al., 2016). Hence, emotions are an important part of the link between perceived firm innovativeness, customer satisfaction and loyalty.

Therefore, understanding where customer emotions and attitudes come from and how they can be affected is something that can impact the strength of, effect of and relationships between perceived firm innovativeness and satisfaction and, therefore, loyalty. Furthermore, especially in today’s competitive market, it is crucial for companies to differentiate themselves from competitors and become the preferred alternative. This illustrates how perceived firm innovativeness may be important for this relationship, which leads us to our final construct of interest: perceived firm innovativeness

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2.4 Perceived Firm Innovativeness

Perceived firm innovativeness is the customers’ perceptions of a sustained ability of the company to create new, creative and powerful ideas and solutions (Kunz et al., 2010). There is a key difference between innovation and innovativeness. Whereas ‘innovation’ focuses on the outcome of firm activity (i.e., goods and services), ‘innovativeness’ refers to the capability of a firm to be open to new ideas and work on new solutions (Crawford & Di Benedetto, 2003). In other words, innovativeness presents the creativeness of the company and whether the company offers – among other things – new solutions or ideas that lead to market changes.

Moreover, innovativeness refers to an enduring characteristic, not to success at one point in time (Hurley & Hult, 1998; Im & Workman, 2004). Thus, perceived firm innovativeness can be conceptualised as the consumers’ perceptions and attribution of such enduring firm capability. Perceived firm innovativeness is not an objective assessment but rather a subjective consumer perception and attribution based on consumer information, knowledge and experiences. That is, consumers evaluate their observations to judge innovativeness (Kunz et al., 2010). To build a consistent image of firm innovativeness, these firm characteristics and behaviours need to be stable over time (Brown & Dacin, 1997), which may include surprising market offers, new product attributes, new design elements and new marketing approaches, along with the overall creativity of the firm and its dynamic market behaviour (Kunz et al., 2010). There are also multiple other perspectives on innovativeness, and the perceived firm innovativeness from these different perspectives can deviate from each other, thus creating a mismatch that is important to be aware of during innovation efforts.

2.4.1 Customer Versus Firm-Based Perceptions

The research from Kunz et al. (2010) focuses on firm innovativeness from the customer’s perspective; this research shows that consumer perceptions of the entire firm – not just new products and technologies – play a key role in the success of innovative efforts. Firms, hence, should also account for a functional-cognitive perspective as well as consumer emotions and experiences. Companies face increased pressure to differentiate themselves in the marketplace through innovation, which is usually addressed through product and technology-focused R&D. The research of Kunz et al. (2010) indicates that innovation research and management can benefit from a broad-based, consumer-centric perspective. A narrow perspective around technical innovation is not enough to be seen as innovative. In this case, it is not enough for a

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product or service to be new in the market. Consumers may feel more engaged with a firm that is innovative in a broader organisational and cultural sense, and this may lead to improved firm performance. Thus, perceived firm innovativeness may be a key element in building customer equity and, ultimately, shareholder value. Because investors are focused on company growth, they may use perceived firm innovativeness as a critical piece of information to judge the value and potential of a company. Here, companies that are perceived as innovative may be more attractive to investors, which may lead to improved company value.

In Tverky and Kahneman’s (1981) research, they look at how people value prospects, or choices, in the market and find that “human beings’ responses to the alternatives before them have four distinct characteristics” (Gourville, 2006, p. 4). The first thing people evaluate is the attractiveness of an alternative regarding its objective, perceived or subjective value. Next, people evaluate new products relative to a reference point, which is usually the products they already own. Third, consumers view any improvements of the new products relative to this reference point, seeing these possible improvements as gains and losses. Finally, losses have a much bigger impact on people than gains. Tversky and Kahneman (1981) call this ‘loss aversion’ which leads people to value products that they already own or consume, more than those they do not. According to Thaler (1980), this can also be referred to as the endowment effect, which implies that people ‘value what they own, but may have to give up, much more than they value what they don’t own but could obtain’ (Gourville, 2006, p. 5). Gourville (2006) shows that adopting an innovation often includes a trade-off. Therefore, it is not enough for an innovation to simply be better because unless the gains far outweigh the losses, customers will not adopt it. Furthermore, Tversky and Kahneman’s (1981) research implies why people stick to what they already own even if a better alternative exists; this is called

‘status quo bias’, which occurs when people have owned a specific product for a short time and intensifies over time. However, consumers are often not aware of their own bias. This may be one explanation of why not all companies see profits after specific innovation investments. For innovative efforts to succeed in the market in terms of customers adopting new products, it may need to go through other factors affecting firm performance.

Another reason why companies may not see profits after innovation investments may be because executives are also biased when it comes to new products: ‘In a perfect world, companies would know that consumers irrationally overvalue incumbent products and would

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take that bias into account when launching innovations’ (Gourville, 2006, p. 7). Executives look at their innovations as the reference point and are convinced that the product works in the market. Moreover, they recognise the need for it, ‘and they are keenly aware of the shortcomings of existing alternatives. … Not having the feature that their innovation provides seems to the developers like a shortcoming and having the features that the incumbent provides does not seem essential’ (Gourville, 2006, p. 7). These executives perceive themselves as ‘visionaries, product champions, or believers, suggesting that they have embraced the world the rest of us haven’t-yet’ (Gourville, 2006, p. 7).

There are several problems with this method of thinking. One problem occurs ‘when the executive’s reference shifts, and they adopt the innovation-as-status-quo perspective’

(Gourville, 2006, p. 7). Just as consumers do, ‘they fall victim to the endowment effect. They overvalue the benefits of their innovations by a factor of three. Like the consumer, executives are also unaware of their bias’ (Gourville, 2006, p. 7). Studies show that ‘when anticipating others’ judgements or choices, people find it impossible to ignore what they themselves already know or believe to be true’ (Gourville, 2006, p. 7). As an illustration, this is why people tend to overestimate the probability that others will have the right answer to a quiz if one knows the answer or why one overestimates the likelihood that others will find a hidden item if that one person knows its location. In this ‘curse of knowledge’, ‘developers expect consumers to see the same value in their innovations that they see’, which results in managers becoming shocked when sales do not materialise (p. 7). This mismatch between executives’

and customers’ perceptions of innovation illustrates why innovation does not necessarily improve firm performance. Furthermore, it shows why the customer-based view is more important in innovations thanks to the adoption-loyalty-income link than the firm-based view.

This illustrates why it is relevant to study the effects of innovativeness form a customer perspective.

In sum, according to Gourville (2006, p. 7), consumers tend to overvalue the ‘existing benefits of an entrenched product by a factor of three, while developers overvalue the new benefits of their innovation by a factor of three’. This may result in a mismatch between what innovators think consumers desire and what consumers really want, illustrating the importance and benefits of a customer-based view regarding innovations. Furthermore, this shows how innovation does not necessarily lead to increased profitability for the company directly, showing the importance of researching how customers’ perceived firm innovativeness of

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companies (through customer satisfaction and loyalty) affects firm performance. This is what makes the term ‘perceived firm innovativeness’ so important to understand because how customers perceive new products or services may have something to say for the effect on firm performance in the end.

2.4.2 The Importance of Custmers’ Perceptions

In previous research, good innovation work has been conducted in the private and public sectors. However, few – if any – have asked customers or users about the perceived firm innovativeness of the companies. Customer reviews may not match the entrepreneurs’, managers’ or employees’ own perceptions of innovation skills and performance (Andreassen, Kurtmollaiev, Lervik-Olsen, 2018). However, this does not make customers an irrelevant source of information; rather, it is the contrary because customers are the ones who the companies are trying to satisfy, and their perceptions of innovativeness are important (Lervik- Olsen et al., 2016). Therefore, Lervik-Olsen et al. (2016) suggest that innovativeness needs to be measured at the company level and that the customer is the final judge of the company’s innovativeness. More precisely, Lervik-Olsen’s et al. (2016) approach towards innovation is based on the idea that businesses – not nations – are innovative, and customers – not managers or experts – are best suited to evaluate the company’s innovativeness. This view is supported by Kunz et al. (2010), who claim that a broad-based customer-centric approach towards innovativeness may be beneficial.

One important reason for companies to listen to customers is that customers’ perceptions of the companies’ innovativeness affect customers’ view of how attractive customers perceive the business to be, compared with other alternatives. In other words, high customer satisfaction and quality are insufficient for a company to remain in the market (Andreassen, Kurtmollaiev & Lervik-Olsen, 2018). The company’s relative attractiveness – as a function of quality and innovation – will affect customer loyalty and repurchasing. Furthermore, a little change in the repurchase rate will have major effects on the customers’ lifetime value, the customer base’s economic value and company value (Andreassen et al., 2018). It is certainly important and interesting from a managerial point of view to understand the underlying factors that influence the repurchase rate. Lervik-Olsen et al. (2016) emphasises the importance of more innovations from established firms to create more profitable and

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productive jobs, specifically in the context of Norway, so it may be highly relevant and interesting to analyse innovativeness in well-established firms in Norway.

2.4.3. What Impacts Perceived Firm Innovativeness

Based on previous research and establish theory presented above, a broad-based customer approach to perceived firm innovativeness can be beneficial. It is also relevant to look into the factors that impact perceived firm innovativeness because these can increase customer satisfaction through excitement and feelings. A central aspect of innovativeness is novelty or newness, which can manifest in several forms. The type of novelty in an innovation can be classified as either product innovation or process innovation (Oslo Manual, 2018). A firm engaged in novelty creation is seen as forward-looking and future oriented. However, introducing new things alone does not make a firm innovative (Kunz et al., 2010). For example, an innovative company like Apple is also seen as highly creative. Using a consumer-centric perspective, creativity broadly includes all types of company efforts and activities seen as unique relative to the competitors and as meaningful to consumers (Amabile, 1988; Im & Workman, 2004; Smith, MacKenzie, Xiaojing, Buchholz & Darley, 2007). Furthermore, creativity is strongly associated with surprise and the unexpected (Besemer & O’Quin, 1986), meaning that a firm’s creativity can stimulate and excite consumers, resulting in new experiences for customers (Haberland & Dacin, 1992).

Finally, consumers are more likely to view a firm as innovative if its novel and creative efforts have an impact in the market. An innovative firm may change established consumption patterns and can be seen as a pioneer in its industry (Kamins, Alpert & Elliott, 2000). Through their ‘generative capacity’ (Moorman & Miner, 1997), firms can radically challenge the status quo and existing industry structure (Usero & Fernandez, 2009). According to Schumpeter’s (1934) classic work on ‘creative destruction’, innovative firms are seen as progressive, dynamic and risk-taking. Empirically, research shows a significant effect of firm and brand innovativeness on business performance and stock returns (Mizik & Jacobson, 2008). Thus, there are multiple potential benefits of being perceived as innovative. However, based on the presented theory, there may be a gap between a firm’s perception and the customers’

perceptions of innovativeness. Therefore, because customers are the final judge of the success of innovation efforts, a broad-based customer-centric view is proposed. In addition, to be perceived as innovative from a customer standpoint, the company needs to have a continuous

Growing by exciting : a study of the effects of perceived firm innovativeness on customer satisfaction, customer loyalty, and firm performance